You start your own business selling boating equipment. To start the business you sell 5,000 shares of stock at $50 each. This year the revenues from the business are $300,000, and total costs of operating the business are $200,000
All profits are paid out as dividends to the shareholders. If the current interest rate is 20%, what is the economic profit being earned by the shareholders? What will happen to the amount of economic profits earned if the interest rate decreases? Explain your answer.
The shareholders are earning an economic profit of $10 per share. We get this by adding up the total costs of the firm: $200,000 plus the opportunity cost of the initial $250,000 which is $50,000 of lost interest income. That gives us a total of $250,000 in total costs. Since revenues are $300,000 the total profit is $50,000 with profit per share of $50,000/5,000 = $10 . If the interest rate decreases, the shareholders' economic profit will increase. The shareholder will still receive $20 in dividends, if they had put their $50 in an interest-bearing account the return would fallen below $10 . Therefore, their economic profit would increase.
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Automatic stabilizers decrease the impact of a recession on the level of economic activity because they
A) reduce the interest rate and so allow firms to increase their level of investment. B) mean disposable income does not change by as much as real GDP. C) increase taxes so the budget is always balanced. D) raise the exchange rate so U.S. exports become more attractive to foreigners. E) increase the quantity of money in circulation.
If Congress authorized the President to lower tax rates or to initiate spending projects when aggregate demand was inadequate, which consequence could be predicted most confidently?
A) Aggregate spending would be more stable over time. B) Recessions would be less severe. C) Recessions would occur less frequently. D) The political power of the President would increase. E) We would experience a lower rate of inflation.
The currency exchange rate is the rate at which one nation's currency can be exchanged for another
Indicate whether the statement is true or false
If U.S. exports are $150 billion and U.S. imports are $100 billion, which of the following is correct?
a. The U.S. has a trade surplus of $100 billion. b. The U.S. has a trade surplus of $50 billion. c. The U.S. has a trade deficit of $100 billion. d. The U.S. has a trade deficit of $50 billion.